2019 (3) TMI 1581 - AT - Income Tax

Addition u/s.36(1)(iii) - disallowance of interest in respect of capital WIP - sufficiency of own funds - HELD THAT - The own fund of the assessee exceeds the amount of capital work in progress. Therefore, a presumption can be drawn that there was no borrowed fund used in such capital work in progress. Accordingly, the question of utilization of borrowed fund in such capital work in progress does not arise. Accordingly, there cannot be any disallowance on account of interest expenses as made by the AO. In holding so, we find support and guidance from the judgment of Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT . Also see HDFC BANK LTD. 2014 (8) TMI 119 - BOMBAY HIGH COURT - decided in favour of assessee. Disallowance u/s.14A r.w.r 8D - No exempt income earned by the assessee in the year under consideration - HELD THAT - It is an undisputed fact that there is no exempt income earned by the assessee in the year under consideration in respect of the investment in shares as discussed above. Once it is on record that there is no dividend income/exempted income then the question of making the disallowance u/s 14A does not arise in view of the judgment of Hon ble Gujarat High Court in the case of Corrtech Energy (P) Ltd . 2014 (3) TMI 856 - GUJARAT HIGH COURT . No disallowance u/s 14A as made by the AO. - decided in favour of assessee. Disallowance of prior period expenses - AO disallowed expenses and held that expenses related to earlier years are not allowed as no corresponding income has been offered. Further, no copy of bills and invoices has been submitted as contended by him - HELD THAT - The assessee in the year under consideration and in the earlier years was paying the tax at the maximum marginal rate. As such there was no loss to the Revenue as the assessee was very much entitled to the deduction of such expenses in the earlier year. Thus merely the assessee omitted to claim the expenses in the earlier year cannot be a ground for the disallowance for the year under consideration. In this regard we find support and guidance from the judgment of Hon ble Gujarat High Court in the case of Indian petrochemicals corporation Ltd . 2016 (9) TMI 110 - GUJARAT HIGH COURT - decided in favour of assessee. Addition u/s 41(1) being the cessation of liability - assessee submitted liability has not been ceased to exist and no benefit by way of cessation or remission in respect of any trading liability is obtained under the meaning of u/s 41(1). The assessee is still under the legal obligation to make the payment - HELD THAT - the provisions of section 41(1) can be applied in respect of those liabilities which have ceased to exist in the books of accounts. From the preceding discussion, there was no dispute that these liabilities are very much appearing in the books of accounts of the assessee. Therefore, in our considered view, the provisions u/s 41(1) cannot be applied to the instant case. Regarding this, we find support and guidance from the judgment of Bhogilal Ramji Bhai Atara 2014 (2) TMI 794 - GUJARAT HIGH COURT - decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition made under Section 36(1)(iii) of the Income Tax Act on account of disallowance of interest expenses.
2. Deletion of addition made under Section 14A read with Rule 8D of the Income Tax Act.
3. Deletion of addition made on account of disallowance of prior period expenses.
4. Deletion of addition made under Section 41(1) of the Income Tax Act on account of cessation of liabilities.

Detailed Analysis:

1. Deletion of Addition under Section 36(1)(iii) - Disallowance of Interest Expenses:
The issue revolves around the disallowance of ?4,52,945/- by the Assessing Officer (AO) under Section 36(1)(iii) of the Income Tax Act, related to interest expenses on capital work in progress (CWIP). The AO argued that the interest cost was not attributed to CWIP, citing legal precedents. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that no depreciation was claimed on CWIP, and the AO had misunderstood the facts. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's own funds exceeded the CWIP, thus no borrowed funds were used, supported by judgments from Reliance Utilities and Power Ltd., HDFC Bank Ltd., and UTI Bank Ltd.

2. Deletion of Addition under Section 14A read with Rule 8D - Disallowance for Exempt Income:
The AO disallowed ?48,19,526/- under Section 14A read with Rule 8D, arguing that the assessee did not allocate any expenditure towards investments in securities. The assessee contended that no exempt income was earned or claimed, and sufficient own funds were available. The CIT(A) deleted the addition, relying on the Gujarat High Court's judgment in Corrtech Energy Pvt. Ltd., which held that no disallowance under Section 14A is warranted if no exempt income is earned. The Tribunal affirmed the CIT(A)'s decision, reiterating the principle that disallowance under Section 14A is not applicable in the absence of exempt income.

3. Deletion of Addition for Prior Period Expenses:
The AO disallowed ?1,38,752/- claimed as prior period expenses, arguing that such expenses related to earlier years and no corresponding income was offered. The assessee argued that the liability crystallized upon receipt of invoices and that the expenses were genuine and tax-neutral. The CIT(A) deleted the addition, noting that the genuineness of expenses was not doubted and citing judgments in Indian Petrochemicals Corporation Ltd. and Nagri Mills Co. Ltd., which support the deduction of genuine expenses even if claimed in a different year. The Tribunal upheld the CIT(A)'s decision, emphasizing that the tax rate was the same in both years, making the disallowance irrelevant.

4. Deletion of Addition under Section 41(1) - Cessation of Liability:
The AO added ?21,12,302/- under Section 41(1), arguing that the liabilities had ceased to exist as they were unpaid for over three years. The assessee contended that no actual cessation or remission of liability occurred, and the legal obligation to pay remained. The CIT(A) deleted the addition, relying on judgments in Bhogilal Ramjibhai Atara and Nitin S Garg, which state that Section 41(1) applies only when there is actual cessation or remission of liability. The Tribunal affirmed the CIT(A)'s decision, noting that the liabilities were still recorded in the books, and thus Section 41(1) was not applicable.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all four issues, emphasizing the principles of genuine claims, sufficiency of own funds, absence of exempt income, and the non-applicability of Section 41(1) in the absence of actual cessation of liabilities. The judgments cited provided strong legal backing for the assessee's contentions.